Any move by the Reserve Bank of Australia (RBA) to cool the housing market or correct the imbalance between home buyers and property investors could backfire, according to analysis by Moody’s.
The relationship between housing wealth and consumer spending has changed in Australia in recent years, according to the ratings agency. Consumer demand is now more sensitive to changing house prices and housing wealth.
The RBA, in its six month Financial Stability Review last month, said it was concerned at the imbalance between investors in property for rent and buyers of homes to live in.
The central bank has questioned whether lending practices are conservative enough for the combination of low interest rates, strong housing price growth and high household indebtedness.
However, Moody’s senior economist Glenn Levine says the RBA is relying on outdated numbers which underestimate the effect rising house prices have on consumer confidence.
“Our results suggest that a sharp downturn in house prices would likely push the Australian economy into recession,” Levine says.
House prices fell by around 5% in both 2008 and 2011, but this was not enough to derail the economy. Yet a more sizable fall is possible, Levine says.
The Moody’s Analytics study suggests a lot of the consumption lift in the last 12 months is thanks to rising house prices and that without it demand could be considerably weaker.
The modelling, assuming rates rise gradually from May next year to more normal levels of 4.5%, shows consumer demand would be lower by 1.3%. The RBA calculation would be only 0.4%.
“Amid a tepid global environment and with the domestic economy in uncertain transition, higher interest rates, if and when they come, may have a greater impact on the Australian economy than previously thought,” Levine says.
“House price appreciation would cool, as expected and as probably desired, but the indirect hit to consumer demand could be larger than expected.
“The RBA should take a cautious approach to normalising interest rates when the time arrives.”